The Eighth Circuit held on August 21 that, in the absence of
actual injury in a data breach case, "massive class action
litigation should be based on more than allegations of worry and
inconvenience." The Court found that no customers of the
defendant securities brokerage firm had suffered fraud or identity
theft resulting in financial loss from a 2013 data security
incident.* Kuhns v. Scottrade, Inc., Nos. 16-3426,
16-3542 (8th Cir. Aug. 21, 2017).

In a decision that is replete with great holdings and quotable
language for defendants in data breach litigation, the Eighth
Circuit demonstrated that even where constitutional standing is
found, plaintiffs will not likely succeed if they can allege no
real injury even years after the hack occurred.

The case was based on a data security incident in which hackers
acquired personal identifying information ("PII") of over
4.6 million customers and exploited the information to operate a
stock price manipulation scheme, illegal gambling websites, and a
Bitcoin exchange. The complaint was based on a contract
theory, alleging that a portion of the fees paid in connection with
the plaintiff's securities accounts "were used for data
management and security." The plaintiff alleged that as a
result of the incident, the purported class of affected customers
faced an immediate and continuing increased risk of identity theft
and identity fraud; incurred financial costs for monitoring their
credit and financial accounts to mitigate against that risk;
overpaid for brokerage services with a diminished value; suffered
economic damage from the decline in value of their PII; and
suffered invasion of privacy and breach of confidentiality.

Standing Found Based on "Overpayment"
Theory

Reversing the district court, the Eighth Circuit found that the
"overpayment theory" was sufficient to grant standing to
sue on a breach of contract theory. The appellate opinion states
that:

"[W]e conclude he has standing regarding his breach of
contract and contract-related claims based on allegations that he
did not receive the full benefit of his bargain with Scottrade.
Kuhns alleges that a portion of the fees paid in connection with
his Scottrade account were used to meet Scottrade's contractual
obligations to provide data management and security to protect his
PII. When Scottrade breached those obligations, Kuhns received
brokerage services of lesser value. He asserts that the difference
between the amount he paid and the value of the services received
is an actual economic injury that establishes injury in fact for
his contract-related claims.

"We have previously explained that "a party to a
breached contract has a judicially cognizable interest for standing
purposes, regardless of the merits of the breach alleged."
Gamestop, 833 F.3d at 909 (quotation omitted)."

More importantly, however, the Court found the complaint's
assertions that the firm "did not comply with applicable laws
and regulations," or did not maintain sufficient security
measures and procedures to prevent unauthorized access, did not
plausibly allege a breach of contract. "First,
representations of conditions Scottrade will maintain are in
the nature of contract recitals. If Scottrade misrepresented
those conditions, Kuhns might have a claim for fraud in the
inducement of the contract. But no such claim was asserted. Indeed,
there was no alleged misrepresentation, just bare assertions
that Scottrade's efforts failed to protect customer
PII." (Emphasis added.) Moreover, the Court
highlighted that plaintiff failed to allege a specific breach of an
express contract or identify a single "applicable law and
regulation" that the company allegedly breached regarding its
data security practices. Further, the Court noted that the
plaintiff did not allege any affirmative promise that customer data
would not be hacked, "and such a promise may not be plausibly
implied."

Implied Premise that a Hack Is Tantamount to Protections
Being Inadequate "Is a 'Naked Assertion[]' ... that
Cannot Survive a Motion to Dismiss" and "Massive Class
Action Litigation Should Be Based on More than Allegations of Worry
and Inconvenience"

Significantly, the Court held that "[t]he implied premise
that because data was hacked Scottrade's protections must have
been inadequate is a 'naked assertion[] devoid of further
factual enhancement' that cannot survive a motion to dismiss.
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quotations
omitted)." Given that the plaintiff could not contest that no
customer had suffered fraud or identity theft from use of their
stolen PII in the more than two years that passed between the data
breach and the filing of the complaint, "massive class action
litigation should be based on more than allegations of worry and
inconvenience."

Alleged Failure of Security Measures Was Not a Plausible
Breach of Contract Based Solely on "Overpayment"
Theory

As to the allegation that the plaintiff overpaid because a
portion of the brokerage services fees were for data
management and security, the Court noted that given the express
terms of the contract, the allegation that the failure of security
measures was a breach of contract that diminished the benefit of
plaintiff's bargain is not plausible. Plaintiff's
claims for breach of implied contract and unjust enrichment were
dismissed for the same failure to allege plausible claims. The
claim for declaratory relief was found "virtually
unintelligible," and focused on past conduct—the 2013
data breach—and not on the firm's current practices.
Also, the plaintiff "cite[d] no precedent for the notion that
the Declaratory Judgment Act provides federal courts with authority
to order a party to 'obey your contract.'"

State Consumer Protection Claims Dismissed Because
Plaintiff Did Buy Data Security Services, and Because Fraud Not
Pleaded with Particularity

The state consumer protection act count was dismissed because a
claim for "fraudulent and deceptive acts" sounds in fraud
and was not pleaded with the particularity required by Rule 9(b) of
the Federal Rules of Civil Procedure. Also, to be actionable under
the state's statute, "an ascertainable pecuniary loss must
occur in relation to the plaintiff's purchase or lease of that
merchandise. And while "intangible services may qualify as
merchandise," the firm "did not sell data security
services." Finally, the Court held that the complaint
"fail[ed] to plausibly allege how failing to discover and
notify customers of the data breach qualifies as an unfair or
deceptive trade practice under the statute."

*Sidley represented Scottrade in connection with its
incident response.

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The underlying case concerned the 2010 explosion and fire on the Deepwater Horizon oil rig in the Gulf of Mexico, when a well which was in the process of being plugged and temporarily abandoned, experienced a blow out.

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